MECO 121 Chapter 6 Notes

MECO 121 Chapter 6 Notes
GDP: Dollar value of all final goods and services produced within countries
border in 1 year.
GNP: The market value of goods and services produced by labour and property
supplied by the counties residents, regardless of where they are located.
1. Doesn’t include financial transactions because nothing is being produced.

2. Bonds/stocks
3. Illegal work
GDP helps compare govt policy.
GDP Growth: GDP2-GDP1/GDP1
4 Components of GDP
1. Consumer Spending
2. Investments/ aggregate expenditures by firms on themselves to increase
future productivity and profitability.
3. Govt spending/ dollar value of expenditures by federal state and local govt
in the aggregate economy.
4. Net Export: Dollar sum difference between the value of exported goods
purchased by foreign consumers and foreign goods purchased by
domestic users.
Real GDP per capita: Real GDP/population
Cost of not doing anything/growth will be 20% less.
Business Cycles: upward/downward movement of economic activity or real

GDP that occurs around the growth trend.
1. Top of cycle is peak.

2. Boom is a very high peak.
3. Downturn/upturn
4. Recession/ decline in real output that persist for more than 2 consecutive
quarters of a year.
5. Depression/large recession/more than 12% unemployment
6. Trough/ bottom of depression or recession
7. Expansion: upturn that last at least 2 consecutive quarters of a year.
Business cycles occur due to changes in demand for goods and services.
Indicators for depression tell 12/15 months before.

Coincident indicators: suggest what is currently happening in an economy.
Lagging indicators: suggest what has happened.
Unemployment: percentage of people in the economy who are willing and able
to work but who are not working.
Criteria for Labour Force:
1. Above 16
2. No full-time student
3. No military
4. No retirement
5. Willing and able to
Types of Unemployment
1. Frictional: unemployment caused by people entering the job market and

people quitting a job just long enough to find another one.
/fired/change/transferable skills/Santa
2. Structural: unemployment caused by institutional structure of an
economy or by economic restructuring making skills obsolete /non-
transferable skills/job doesn’t return
3. Cyclical: unemployment resulting from fluctuations in economic activities.
/Economy crash/low demand for labour/depression entirely preventable
Target Rate of unemployment: lowest sustainable rate of unemployment that

policy makers believe is achievable given existing circumstances.
Why the Target rate of unemployment change?
1. Low inflation incompatible with low unemployment rate

2. Different age groups have different unemployment rates.
3. Economy changing social and institutional structure/women role in
workplace.
4. Govt Institutions/ people need better jobs and not compromise.
Who is responsible for unemployment?
1. Classical: individuals are responsible for finding jobs

2. Keynesian: society and govt owes job to people and not far from home.
How is unemployment measured:
1. no of unemployed/labour force
No of people unemployed: Labour force – employed.
How accurate is unemployment rate:
1. Keynesian argue BLS undercounts unemployed significantly.

2. Classical argue BLS method exaggerates the unemployed
3. Doesn’t include frustrated/deceitful.
4. Doesn’t consider underemployment.
5. Doesn’t reflect workplace inequality.
Inflation: continual rise in price level
Deflation: a continual fall in the price level.
A price index is calculated by dividing the current price of a basket of goods by

the base price of a basket of goods.
The total output deflator, or GDP deflator (gross domestic product deflator), is
an index of the price level of aggregate output, or the average price of the
components in total output (or GDP), relative to a base year. (Recently, another
price index, the chain-type price index for GDP, has become more popular; it is a
GDP deflator with a constantly moving base year.) The GDP deflator is the
inflation index economists generally favor because it includes the widest
number of goods, and because the base period is adjusted yearly.
The consumer price index (CPI) measures the prices of a fixed basket of
consumer goods, weighted according to each component’s share of an average
consumer’s expenditures.In the mid-1990s, many economists believed that the
CPI overstated inflation by about 1 percentage point a year, and the Bureau of
Labor Statistics implemented a number of changes that address some of those
problems. In order to avoid some of the problems with the CPI, some policy
makers have recently been focusing on another measure of consumer price.
The personal consumption expenditure (PCE) deflator. The PCE deflator is a

measure of prices of goods that consumers buy that allows yearly changes in the
basket of goods that reflect actual consumer purchasing habits.
The producer price index (PPI) is an index of prices that measures average
change in the selling prices received by domestic producers of goods and
services over time. This index measures price change from the perspective of
the sellers, which may differ from the purchaser’s price because of subsidies,
taxes, and distribution costs and includes many goods that most consumers do
not purchase.
There are three different producer price indexes for goods at various stages of
production—crude materials, intermediate goods, and finished goods. Even
though the PPI doesn’t directly measure the prices consumers pay, because it
includes intermediate goods at early stages of production, it serves as an early
predictor of consumer inflation since when costs go up, firms often raise their
prices.
Real output is the total amount of goods and services produced, adjusted for
price-level changes.
Nominal output is the total amount of goods and services produced measured
at current prices.
Real Output: nominal output/price index *100
% Change in real output: % change in nominal output – inflation
Real interest rate: Nominal interest rate - Inflation rate
Expected inflation is inflation people expect to occur. Unexpected inflation is

inflation that surprises people.
Expectations of inflation play an important role in any ongoing inflation. They

can snowball a small inflationary pressure into an accelerating large inflation.
Individuals keep raising their prices because they expect inflation, and inflation
keeps on growing because individuals keep raising their prices. That’s why
expectations of inflation are of central concern to economic policy makers.
While inflation may not make the nation poorer, it does cause income to be
redistributed, and it can reduce the amount of information that prices are
supposed to convey
Inflation has costs, but not the costs that most people associate with it.
Specifically, inflation doesn’t make the nation poorer. True, whenever prices go
up somebody (the person paying the higher price) is worse off, but the person
to whom the higher price is paid is better off. The two offset each other. So
inflation does not make society on average any poorer. Inflation does, however,
redistribute income from people who cannot or do not raise their prices to
people who can and do raise their prices.
Thus, inflation can have significant distributional or equity effects, which often
create feelings of injustice about the economic system.
Hyperinflation is exceptionally high inflation of, say, 100 percent or more per
year.

MECO 121 Chapter 6 Notes

Uploaded by

Copyright:

Available Formats

MECO 121 Chapter 6 Notes

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

MECO 121 Chapter 6 Notes

Uploaded by

Copyright:

Available Formats

MECO 121 Chapter 6 Notes

1. Doesn’t include financial transactions because nothing is being produced.

GDP helps compare govt policy.

GDP Growth: GDP2-GDP1/GDP1

Real GDP per capita: Real GDP/population

Cost of not doing anything/growth will be 20% less.

Business Cycles: upward/downward movement of economic activity or real

1. Top of cycle is peak.

Indicators for depression tell 12/15 months before.

Lagging indicators: suggest what has happened.

Criteria for Labour Force:

1. Frictional: unemployment caused by people entering the job market and

Target Rate of unemployment: lowest sustainable rate of unemployment that

Why the Target rate of unemployment change?

1. Low inflation incompatible with low unemployment rate

Who is responsible for unemployment?

1. Classical: individuals are responsible for finding jobs

No of people unemployed: Labour force – employed.

How accurate is unemployment rate:

1. Keynesian argue BLS undercounts unemployed significantly.

Inflation: continual rise in price level

Deflation: a continual fall in the price level.

A price index is calculated by dividing the current price of a basket of goods by

The personal consumption expenditure (PCE) deflator. The PCE deflator is a

Real Output: nominal output/price index *100

% Change in real output: % change in nominal output – inflation

Real interest rate: Nominal interest rate - Inflation rate

Expected inflation is inflation people expect to occur. Unexpected inflation is

Expectations of inflation play an important role in any ongoing inflation. They

You might also like